Kauai County, Hawaii, was downgraded by Fitch.

LOS ANGELES — Fitch Ratings downgraded Kauai County, Hawaii's general obligation bonds a notch to AA-minus from AA April 24, affecting $188 million in debt.

Fitch analysts cited the county's persistent operating imbalance and reduced financial flexibility following a substantial reduction in reserves over the past several years as reasons for the downgrade.

"General fund expenditures rose steadily throughout the downturn," analysts said. "Recent salary increases resulting from state-level negotiations exceeded management estimates and have contributed to ongoing budget challenges."

The county also has opted to minimize the use of potential labor cost control measures such as furloughs, layoffs, or temporary salary reductions, according to the report.

Kauai County has a population of 68,000 on the two northern Hawaiian islands it occupies. It is the smallest of the four Hawaiian counties in size, operating budget and population.

The county has responded to operating deficits with property tax rate increases, according to a Fitch Report. It may also benefit from recent growth in assessed values and proposed state legislation to eliminate a cap on counties' share of transient accommodation tax.

While those factors may help restore operating balances, they do not appear sufficient to raise reserves to previously high levels, Fitch analysts said.

Unrestricted fund balances fell by more than half between 2010 to 2013 from 62% to 27% of general fund spending.

The bonds are absolute and unconditional general obligations, supported by the full faith and credit of the county and an unlimited pledge of ad valorem property tax.

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